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Question
y Ltd.'s profit after interest and tax was ₹ 1,00,000. Its Current Assets were ₹ 4,00,000; Current Liabilities ₹ 2,00,000 ; Fixed Assets ₹ 6,00,000 and 10% Long-term Debt ₹ 4,00,000. The rate of tax was 20%. Calculate 'Return on Investment' of Y Ltd.
Solution
Return on Investment = (Net Profit before Interest, Tax and Dividend/ Capital Employed × 100)
Let Profit before tax be ₹ 100
Tax = ₹ 20
Profit after tax = ₹ (100 – 20) = ₹ 80
If Profit after tax is ₹ 80 then profit before tax is = ₹ 100
If Profit after tax is ₹ 1,00,000 then profit before tax is = ₹ (1,00,000 × 100/80) = ₹ 1,25,000
Interest on long-term borrowings = ₹ (4,00,000 × 10/100)= ₹ 40,000
Profit after interest and Tax = ₹ (1,25,000 + 40,000) = ₹ 1,65,000
Capital Employed = Fixed Assets+ Current Assets – Current Liabilities
= ₹ (6,00,000 + 4,00,000 – 2,00,000) = ₹ 8,00,000
Return on Investment = (1,65,000/8,00,000 × 100 )= 20.625% or 20.63% (approx.)
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